Do You Need Credit Insurance with a Bad Credit Mortgage?

By Barbara Marquand
Mortgage Credit Problems Columnist

When you apply for a mortgage or home equity loan, the lender might ask if you want credit insurance to protect the loan in case you can't make payments sometime in the future. This might sound like a smart idea in the wake of recent foreclosures, but consumer advocates warn that the insurance is pricey, and you should consider other options before buying.

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Don't confuse credit insurance with mortgage insurance. Credit insurance is a voluntary policy to cover your risks in case you can't pay your mortgage. Mortgage insurance is a policy lenders require you to purchase to cover their risks if you can't afford a sizable down payment.

Credit insurance comes in three main types for mortgages:

  • Credit life insurance pays off your mortgage if you die.
  • Credit disability pays the mortgage if you become ill or disabled and can't work.
  • Unemployment credit insurance kicks in if you get laid off.

The idea of losing your home after you've worked so hard to save for a down payment and qualify for a mortgage is a indeed scary. But there might be other less-expensive alternatives to credit insurance, such as life insurance, to provide peace of mind. Talk to your insurance agent about options.

Poor Credit Home Loans: Don't Pay For Extras you Don't Need

Consider the following points when thinking about credit insurance:

  • Rates
  • How much is the premium? Compare what your monthly payment would be with and without credit insurance.

  • Coverage
  • Get the specifics on what the policy will cover. What are the limits and exclusions? Will the insurance cover your full mortgage payment for the life of the loan if you die? How much of your mortgage will the credit insurance pay if you become disabled or get laid off, and how long will the insurance payments last? If you and your spouse are getting a mortgage, does the credit insurance cover both of you?

  • Effective Date
  • Ask when the policy becomes effective and whether there's a waiting period. By law, you can cancel the policy and get a refund of unearned premium. And in many states, you can get a full refund during a "30-day free look" period.

    Shop Around for Bad Credit Lenders

    Find another lender if yours pressures you into credit insurance or other extra products, the Federal Trade Commission advises. It's illegal for a lender to require you to buy credit insurance to get the loan. You can get quotes for poor credit home loans by entering your information on this page.


    http://financialservices.house.gov/ / http://www.ftc.gov/ / http://www.federalreserve.gov/

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